This week has brought us more opinions from the Bank of England.Yesterday saw the man who Time magazine decided was one of the 100 most influential people in the world in 2014. Sadly it has been rather a slippery slope since then for the Bank of England’s Chief Economist Andy Haldane who did at least offer some variety on the apochryphal story about the two-handed economist. From Reuters.

Bank of England Chief Economist Andy Haldane said on Thursday that the central bank could decide to raise interest rates or to cut them if there was a disorderly, no-deal Brexit.

Although much more of a clue was given in the follow-up detail.

“on the balance of factors such as a fall in the value of the pound and the reduction in supply………just as it did pre-referendum,”

If we assume he has confused the word pre and post we see he is signalling us towards a fall in the pound £ he ignored and the way he panicked and demanded a cut in interest-rates as well as more QE. Also according to @LiveSquawk he told the audience this.

BoE Haldane: Impact Of Rate Hikes So Far Modest

That might be because in net terns there has only been one as the move in November simply reversed the 2016 mistake.

I note these days that those who tell us how intelligent he is, seem to have disappeared, and even the Reuters piece is accompanied by a picture of him looking a bit wild-eyed. The mainstream view that he is/was a deep thinker has been replaced by the view he is deep in something else. As to his campaign to be the next Governor of the Bank of England? You find out all you need to know by the way he was at Symonds College on Monday. His idea of a Grand Tour around the country to a chorus of acclaim has morphed into giving talks to sixth-form colleges and please do not misunderstand me I mean no offence to the students of Winchester. However I do suggest they ignore the failed output gap theory that he keeps trotting out.

QE

Earlier this week Gertjan Vlieghe was more revealing than I think he intended about QE and its effects. Let me illustrate with his view on how it works. First he tells us that unwinding QE is no big deal.

This view of how QE works implies that unwinding QE need not have a material impact on the shape of the yield curve, or indeed on the economy, if properly communicated and done gradually.

There is an obvious problem here which is that if taking it away does not have a material effect on the economy then how did applying it have a positive effect? Also if it is so easy to do there is the issue of why the Bank of England has not done any? Let us see how he thinks it works.

I argue against the view that QE works primarily by pushing down long-term interest-rates directly, through compressing the term premium ( the portfolio balance channel)……..my view that QE works primarily via expectations, with powerful additional liquidity effects which are temporary and mainly relevant during periods of market stress.

We note immediate;y that he downplays the most obvious effect it has had with is the lowering of many bond yields around the world to what have been unprecedented levels. Odd when that was so clearly in play when Gertjan applied QE in August 2016 and the UK ten-year Gilt yield plunged to an extraordinary 0.5% and some yields in the short to medium range went negative for a while. No doubt economic historians will call that “Haldane’s heights” or the “Carney peak” for Gilt prices because unless the Bank of England has another go at impersonating a headless chicken such levels are extremely unlikely to be seen again.

Rather than the route above where bond yields fall and have an impact via lower fixed rate mortgage and company borrowing costs he seems to prefer the expectations fairy. Here individuals and companies are supposed to respond positively to something the vast majority do not understand and more than a few either have not heard of or do not care. This sort of thinking has been notable in the rise of Forward Guidance where central bankers seem to believe or at least be willing to claim and imply that the population hangs on their every word.

The view on liquidity is interesting as it is another clear area where there is an impact as money is indeed created in electronic form and the money supply raised. This particularly affects narrow measures of the money supply as for example in Japan an initial target was to double the amount of base money. The problem comes when we try to follow the trail of where the liquidity created went? In the early days of Bank of England QE much of it seemed to get deposited straight back to the Bank itself. But over time we can spot clear signs of its impact on the financial system in two ways. The first is the impact on asset prices and especially house prices with London in the van. But even that is complicated as credit easing most recently in the form of the £126 billion or so of the Term Funding Scheme was also required. Next is the way that the Bank of England so often denies any such impact these days which relies on us forgetting the research produced by it around 2012.

Also you note that Gertjan seems to have forgotten the meaning of the word temporary as in “liquidity effects” as not one penny of the £435 billion of Bank of England QE has ever been withdrawn. So on the state of play so far it has been permanent and furthermore there is no apparent plan to change that.

Comment

As we note yet more attempts from the Bank of England to tell us that up is the new down another issue has popped up this morning that they will have hoped we have forgotten. Here is Ben Broadbent on the first quarter of 2018 from the May Inflation Report press conference.

they’re nonetheless consistent with growth much stronger than 0.1%………do not point to anything like as weak as 0.1%

Next here is the announcement this morning from the Office for National Statistics.

This follows a soft patch earlier in the year, where the UK economy grew by a revised 0.1% in Quarter 1 (Jan to Mar) 2018.

So we have seen a downwards revision to 0.1% meaning that the antennae of Ben Broadbent now have a 100% failure rate. So it is way past time for him to stop relying on surveys which keep misleading him. Actually if we look at the source of the change we see that the ONS is also finding itself in quicksand.

Construction output fell by a revised 1.6% in Quarter 1 2018, marking its weakest quarterly growth since mid- 2012. It was previously highlighted that the adverse weather conditions earlier in the year had some impact on the construction industry.

I guess they are hoping we have forgotten that they told us the weather was not much of a factor! More serious is the fact that for the past 4/5 years their measurement of construction output has been a complete mess. The have told us it was in recession ( now revised) and then that it was doing much better ( which also seems to have now been revised). Along the way we have had a large company switched from services to construction and modifications to the deflation measure of inflation. I can tell you that my Nine Elms crane index is still at its peak of 40.

So there have been much better days for both the ONS and the Bank of England. Returning to the issue of QE I would like to remind you of Wednesday’s article on the drawbacks from it which look rather more concrete than the claimed gains. As for Governor Carney he has been too busy this week flying to North America and back so he can lecture people on the dangers of climate change.